Assignment1_PartI_solution

# Assignment1_PartI_solution - The Johnson School at Cornell...

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Professor 1. A (\$ in m 2. Pa (t (a (b (c 3. (a (b r George Ga margin call w \$2000). Sinc ncrease of mo argin call. Th arameters: S time to matur a) The forwa b) The presen The new fo c) Let t, u, an following a Note that two forwa a) The foreig this to solv This formul the dollar p b) Given a Ja price of th some Yen denotes th The Joh ao A will be issued ce we are sh ore than x dol hus x = \$0.2 = = 100 (spot p rity of the for rd price is ܨ ൌ nt value of th orward price i ܨൌ ሾܵ െ nd T denote n arbitrage: the arbitrage rd prices (wit n exchange fu ve for the Jap la holds only price of 1 yen apanese (Yen e Japanese Y to form the he value of 1 P hnson Scho ssignment when the ac horting the f llars per bush = 20 cents. price), r = 0.05 rward). ൌ ܵ݁ ௥ఛ ൌ10 e dividend is s: ܸܲሺܦሻሿ݁ ௥ఛ ow, 2 month e profit at T is th rounding e utures/forwa panese intere ݎ ൌݎ ௎ௌ ܶ if we state th : ܵሺݐሻ ൌ ଵଶ଴ n) interest ra en is too low e following a Japanese Yen Page 1 of 3 ool at Corn t 1 (Part I S count balance futures, we l hel such that 3 5 (risk free ra ଴.଴ହൈ଴.ଶହ ܸܲሺܦሻൌ1 ൈ ൌ ሺ100 െ 0.9 s later and 3 exactly 101.2 error). ard formula is st rate gives: 1 െݐ ln ቆ ܨሺݐ, ܵሺݐ he spot and fu ଴.ସସ ൌ 0.0083 ate of 1% in . We want to arbitrage (all n in 3 months nell Univer Solution) e drops below lose money 3000 – 2000 ate, annualize ൌ 101.258 ൈ ݁ ି଴.଴ହൈ భమ 992ሻ݁ ଴.଴ହൈ଴.ଶ months later 258 – 100.253 ܨሺݐ, ܶሻൌܵሺ ܶሻ ቇሺൌ1.491 utures prices

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## This note was uploaded on 10/26/2010 for the course JOHNSON 6730 at Cornell.

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Assignment1_PartI_solution - The Johnson School at Cornell...

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